Risk Premia, Firm Insurance, and Endogenous Labor Income Risk

Maarten Meeuwis, Dimitris Papanikolaou and Lawrence Schmidt

No 35781, NBER Working Papers from National Bureau of Economic Research, Inc

Abstract: We study how aggregate financial conditions shape firm insurance and, through it, labor income risk. In a directed search model with dynamic wage contracts and two-sided limited commitment, firm insurance against idiosyncratic shocks erodes when risk premia rise. Using U.S. administrative data, we document new evidence supporting the model: pass-through of firm shocks to earnings rises in bad times, especially for lower-paid workers near the separation margin. The model reproduces many untargeted time-series and cross-sectional features of earnings risk and implies substantial welfare costs of idiosyncratic risk, high private discount rates on human capital, and large gains from recession-contingent transfers.

JEL-codes: D52 E0 E24 E32 E44 G0 G12 J0 J08 J31 J41 J63 J64 J65 (search for similar items in EconPapers)
Date: 2026-09
Note: AP EFG LS ME
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